Tax Break as a Not-So-Secret Weapon

By JULIE SATOW

January 7, 2014

The tax break wars are heating up again, as New Jersey aggressively pushes a revamped program to encourage businesses to stay or move within its borders.

The retooled tax credit is called Grow New Jersey, a consolidation and expansion of several previous programs. Some companies, even those already in the state, might be eligible for as much as $300 million in tax credits per project.

The state’s neighbors, particularly New York and Pennsylvania, are not taking the competition lightly, their officials say, particularly at a delicate time when certain regions are still struggling to climb out of the recession. Both states have been watching New Jersey’s moves, and seem to gearing up for a combative response.

So while New York City recently saw a major tax credit program expire that could put it at a disadvantage, Gov. Andrew M. Cuomo has been promising that he wants to push a new set of incentives for businesses — especially in beleaguered upstate New York — to try to stave off business flight.

Pennsylvania has been successful at wooing e-commerce companies and their enormous distribution centers to the state, although it too could face tougher challenges given how high the stakes are for economic investment.

“States are facing a Darwinian struggle for jobs, and New Jersey is using these incentives aggressively, and they are using them frequently,” said Joseph J. Seneca, a professor at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.

The New Jersey tax credits allow any company to apply for the 10-year credits, regardless of its size or type, as long as it is considering leaving the state or moving there and meets certain other capital investment and job requirements. The amount of the credit depends on location, the size of the work force, wages and other criteria. For example, a company relocating from another state that would move to a depressed urban area and would hire hundreds of people could earn as much as $300 million in credits.

The New Jersey program also seems to encourage an exchange of tax credits among companies, by permitting a company with little corporate income tax liability to sell some of its credits at a slight discount to another company.

“This is really substantial — it isn’t a tax credit you can lose, because you can sell them, so that is very appealing,” said Dan Breen, an executive vice president for business and economic incentives at Jones Lang LaSalle. “I have had some clients that are now looking at New Jersey that might not have otherwise, because of the difference in the incentive environment.”

The state Legislature approved the Grow New Jersey program in September, and in December it announced its first round of recipients: in exchange for nearly $93 million in tax credits, five companies agreed to retain 925 full-time employees in New Jersey and create 900 new jobs for a period of up to 15 years. The companies are Valeant Pharmaceuticals, the IDT Corporation, VF Sportswear, WebiMax and Marathon Data.

For years and years, tax breaks for major companies have been heavily criticized as corporate welfare by government reform groups, which argue that extremely well-off businesses are rarely penalized with a loss of credits if they fail to produce jobs. And fiscal conservatives often warn that the loss of millions of dollars in tax revenue year over year hampers a state from shoring up funds for the next possible downturn.

The Legislature approved the Grow New Jersey program in September, and in December it announced its first round of recipients, including Valeant Pharmaceuticals, which is leaving its current home for another.

Aaron Houston for The New York Times

But the lure of bigger and broader protections keeps companies jockeying for the incentives. And the states have tried to work in provisions to keep the companies in check. In the case of Grow New Jersey, for example, recipients must certify they have created or maintained the specified number of jobs, and if they fail to meet the requirements, the state could withhold the credits or even require the companies to reimburse them.

“Our business development team has been fielding numerous calls by potential applicants,” Tim Lizura, the president and chief operating officer of the New Jersey Economic Development Authority, which oversees Grow New Jersey, said in an email. He said the next set of potential recipients would be recommended after the authority’s monthly meeting in mid-January.

And the state keeps burnishing its welcome mat, real estate experts say. Robert C. Kossar, the market director for New Jersey and Long Island operations for the brokerage firm Jones Lang LaSalle Americas, praised New Jersey’s lieutenant governor, Kim Guadagno, for her accessibility.

“Kim Guadagno gives everyone her cellphone — she’s made it her business over the last three years to be a conduit for the business community,” he said.

States that typically compete with New Jersey are taking notice. For its part, New York offers two main incentive programs: Excelsior, which provides tax credits to companies in certain industries like high tech and biotech that create jobs, and Start-Up NY, a new program that is creating tax-free zones within university campuses for new or expanding companies that are generating new jobs.

“Increasingly, states compete for investments from companies around the country and the globe,” said Kenneth Adams, the president and chief executive of Empire State Development and the commissioner of the New York State Department of Economic Development. “New York has been making changes to its programs and it isn’t a surprise to us that New Jersey is making changes to their programs. But frankly, we are really focused on what we have to offer here in New York.”

The New Jersey push comes at a tricky time for New York City. Last year, a tax credit program that had been in place for years for businesses in parts of Manhattan and the other boroughs expired, catching many by surprise. “Companies had assumed they would get it and now they are in limbo, and that sends the wrong signal to the business community,” said Romel C. Cañete, an executive managing director at Newmark Grubb Knight Frank.

Businesses are also warily eyeing the new mayor, Bill de Blasio, who made income inequality a chief message of his campaign. “It is safe to say the new mayor doesn’t seem to be overly aggressive in creating incentives for corporations,” said Timothy R. Greiner, an executive managing director at Newmark Grubb Knight Frank. On the other hand, he said, Gov. Chris Christie “has his arms wide open, telling anyone who will listen to bring their companies to New Jersey.”

Still, some companies choose to remain in New York even if costs may be lower elsewhere. And there are instances where the city and state have provided lucrative incentives, such as last year, when subsidies worth $127 million were given to Fresh Direct to move to the Bronx rather than relocate to New Jersey. The company is building a 500,000-square-foot warehouse there that is expected to open in 2016.

Pennsylvania could also see the loss of some business as a result of the new incentives. Aside from Amazon, which announced plans in 2012 to build two large warehouses in New Jersey, Pennsylvania has mostly cornered the market for e-commerce logistics and distribution centers. These warehouses must be close to FedEx and United Parcel Service hubs, as well as to population centers, and Pennsylvania has been a popular option because land there is relatively cheap and the state offers numerous incentives.

Now, however, “this incentive program really tips the scale,” Mr. Kossar said. “It isn’t rocket science to figure out that we are closer to New York City, and so as long as we have the land available, it’s clear that New Jersey will get a disproportionate amount of these projects.” He is working on a number of large retail distribution centers in New Jersey that he expects will be announced in the next several months.

For its part, Pennsylvania says it is ready to compete. Speaking of Gov. Tom Corbett, Steve Kratz, the director of communications for the Pennsylvania Department of Community and Economic Development, said, “We recognize that New Jersey is upping their game, but Governor Corbett is also very focused on private sector job growth.”